Reimbursing Tips Paid Out of Pocket

To address the unruly expense of out-of-pocket tips, Recharged Education invited Mary S. Schaeffer, AP Now, to share her expertise on the matter. Below she provides five suggestions to help your organization tighten its policy.

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A Reasonable Person’s Policy for Reimbursement of Tips Paid Out of Pocket

by Mary S. Schaeffer, AP Now

I received a phone call the other day from a manager pulling his hair out over reimbursement requests for tips paid out of pocket by one of the firm’s traveling employees. This particular employee was putting in for $100 for tips in one round sum each time he traveled. The employee claims this is for things like having a cab called, bags brought to the room, or the staff that cleans the hotel rooms. Now, I'm willing to bet this is sending up a red flag in front of everyone reading this. The frazzled manager wanted to know how other organizations handle tips and whether there were any IRS guidelines to help him in this regard. We asked readers about this issue and several dozen provided input from which we have devised a “Reasonable Person’s Tip Policy.”

The IRS Guidelines vs. Organization Requirements

The IRS limit for expenditures without receipts is $75.* Few organizations have gone this high. Most are stuck firmly at $25 or lower, and our big tipper is one of the reasons. Running through the comments from readers, as well as in conversations with many professionals with a T&E focus, I’ve heard remarks about employees who routinely put in for reimbursement just below the receipt level no matter what. “My experience has been that some people will submit whatever they think they can get though, right up to the limit set for requiring a receipt, and then submit multiple items under the limit,” wrote one manager. “We have one person who travels regularly and every meal costs him exactly $15, which just so happens to be our limit for no receipt. Imagine that!” she says.

*IRS rules are always subject to change.

Five Suggestions for Managing Tips

Reading the comments from our readers, it quickly became clear that a policy could be put together from their experiences. Based on these interviews, here are reasonable requirements:

  1. Document the tip policy as part of the formal written travel & entertainment policy.

  2. Require employees to itemize tips, explaining the purpose of each. You might want to include in the policy a range for each type of tip.

  3. Tips for meals should be included and shown on the meal receipt.

  4. If the amounts seem unreasonable, give processors the authority to question the submitter.

  5. Make the approver responsible for everything on the employees’ expense reports. If something is amiss—for example, the $100 in tips on every trip—both the employee and the approver should be called into a high-level executive’s office to explain. We expect this will only need to happen once.

Concluding Thoughts

It is unfortunate that valuable time be spent documenting a policy for something as mundane as tips given by traveling employees. But, as the question revealed—and our readers’ comments backed up—it is regrettably necessary.


About the Author

Mary S. Schaeffer, a nationally-recognized accounts payable consultant, is the creator of the AP Now website. She speaks regularly at live and online events; has written 18 business books, most focused on accounts payable issues; and has created many CPE courses for CPAs. Additional information can be found at www.ap-now.com.